Dematerialisation of B2B Finance: Implications for the Treasurer

Removing paper from business processes has been a business driver for companies and an ideal for many years, yet in reality few can claim to have fully achieved this ambition. The dream of the paperless office is, however, a little closer today than ever before. To date, the most successful area of digitisation has been in business-to-business (B2B) integration across the supply chain, where companies linked in the production of goods share electronic commercial messages. Advancements in technology and the arrival of internet-based cloud solutions have evolved the landscape of B2B and have started to extend the benefits of electronic transactions to a wider audience.

Increasingly, finance teams recognise the importance of dematerialising their payables and receivables processes and this is driving a new market, commonly understood as electronic invoicing (e-invoicing). Merriam-Webster defines dematerialisation as causing something to become or appear immaterial; in this case the something is paper invoices. There are obvious internal benefits through process efficiencies, improved visibility and cost savings, but increasingly an automated finance process offers working capital optimisation opportunities that are attractive to a treasurer.

Companies looking to dematerialise have several options:

  • Scan and capture: Paper invoices are sorted, scanned and then data is captured either through manual keying or optical character recognition (OCR) technologies. These solutions have shown benefits for companies with little automation but are not considered true e-invoicing as they provide incremental benefits only and do not truly remove the paper.
  • Web e-invoicing: This combines cloud-based solutions that allow trading partners to submit invoices electronically, typically through web portals. These solutions incorporate relevant tax compliance rules around the submission and storage of an e-invoice, and have been successful in enabling small and medium-sized enterprises (SMEs) in the indirect materials category.
  • Electronic data interchange (EDI) e-invoicing: Trading partners send and receive electronic business documents such as purchase orders, autonomous system numbers (ASNs) and invoices through enterprise resource planning (ERP)-to-ERP integration. EDI incorporates e-invoicing and has been very successful in automating supply chains and direct materials spend, and can also incorporate necessary tax compliance rules.

For large buyers, receiving paper invoices is time-consuming and expensive. By automating the payables process, companies can reduce their invoice processing costs by 62% (Billentis, 2012). An incremental benefit is that supplier satisfaction is improved through enhanced collaboration and on-time or early payment. The challenges are similar for suppliers. By automating the receivables process they can reduce their invoice submission costs by 57%, according to the 2012 e-invoicing report by Billentis.

Additional e-invoicing benefits for the buyer include streamlined accounting processes, decreased costs, and improved financial reporting. Supplier collaboration provides transparency and allows both trading counterparties to resolve disputes quickly. Suppliers optimise cash management with clear payment dates, reduce collection costs and also achieve cost savings by removing paper.

Supply Chain Finance

When buying on credit (open account), a buyer takes on the supply risk and is obliged to match a purchase order, shipping notice or warehouse data to the supplier invoice. This is seen as low risk for the buyer, as goods can be rejected on inspection for various reasons and payment will be made only if a full match occurs and at conclusion of payment terms. Combined with buying on credit, many buyers have lengthy payment terms. This practice extends their days payables outstanding (DPO) and optimises the working capital available for investment.

For a treasurer, an automated finance process offers interesting working capital opportunities through trade finance opportunities that can exceed returns from extended DPO. The holistic term ‘supply chain finance’ (SCF) is used to encompass all forms of buyer/supplier finance, both domestically and internationally, but the term has become synonymous with new finance models enabled by an automated B2B process.

When selling on credit, the supplier assumes all the credit risk. Cash flow is always a priority for SMEs, but they are often challenged with a lengthy cash conversion cycle due to extended payment terms, late or even non-payment. If a supplier can be offered a discounted early payment at an annualised rate below their current cost of borrowing, this becomes an attractive form of credit.

Suppliers traditionally use bank loans, credit cards, asset-based lending, and receivables factoring to fund their companies. But newer forms of trade finance leveraging the credit worthiness of the (usually larger) buyer offers suppliers access to low-cost credit, typically below their current cost of borrowing. These new SCF short-term investment models are also highly attractive to buyers as they offer a treasurer returns above market rates. For example a typical 1% discount represents an 18% annualised yield.

If buyers have excess liquidity, they can choose to leverage their own working capital and engage in ‘dynamic discounting’ programmes. An alternative scenario is where banks sit in the middle of the buyer/supplier dynamic and use their own balance sheets to fund the early, discounted payment. What is consistent for SCF, whether funded through working capital or third-party financing, is that both are enabled by an automated finance process. The speed at which invoices can be delivered, approved and made ready for payment, enabling SCF programmes, is dependent on e-invoicing.

The Treasurer’s Role in a Stable Supply Chain

When larger buyers are in such a dominant position, why would a treasurer consider paying suppliers early? There are various reasons, which we will examine briefly, but the primary driver is supply chain risk.

Treasurers find themselves embroiled in the dynamics of their company’s physical and financial supply chains. The implications of supply chains failing are well known, and recent high profile natural disasters in Asia have underlined this. To reduce the impact of disruption and ensure business continuity, many large corporates are re-examining their supply chains and implementing proactive strategies to mitigate risk such as dispersing their portfolio of suppliers and facilities. When examining supply chain risk, many events fall under the term ‘disruption’ such as natural disasters, war, terrorism and single-supplier dependence; but perhaps one driver that large buyers have the most control over is supplier bankruptcy.

Many suppliers currently face a liquidity challenge. Generally, suppliers are smaller firms and their credit rating drives their ability to borrow working capital at competitive rates within today’s tough lending environment. Late payments, either as a result of poor customer payment processes or extension of payment terms, also compound credit risk for suppliers.

Credit risk was highlighted by a 2011 survey from the UK Federation of Small Businesses (FSB) which revealed that 73% of businesses were paid late in 2010-11 with the average SME owed £27,000 (€34,000, US$42,000) at any one time. Suppliers face a double-whammy: lack of access to credit and a longer cash conversion cycle. Buyers offering discounted early payments to suppliers enable a simple method of injecting liquidity into the supply chain. Discounted early payments reduce the need for suppliers to invoke high-cost financing options such as factoring receivables or asset-based lending, and indirectly avoid supply chain disruptions through insolvency or increased costs.

By reducing working capital concerns, buyers help suppliers smooth out peaks and valleys in cash flow. It is logical that if a buyer’s cost of goods includes the supplier’s cost of borrowing, the buyer’s cost of goods is reduced over time by reducing the supplier’s borrowing needs or enabling lower-cost financing options.

Which Supplier?

Where previously discounts were reserved for key suppliers, automating a SCF programme potentially widens a company’s ability to offer discounted early payments to more suppliers.  But if a treasurer is to engage in a SCF programme, which form of B2B dematerialisation is appropriate for their company? Initially we introduced the common methods of removing paper from the process, and this analysis has particular relevance for a treasurer.

  • EDI e-invoicing: EDI has the longest history of all e-invoicing models and has been evolving since the late 1960s. EDI matured in the 1990s and rapidly became the de-facto method of global B2B communication between trading partners within direct material spend. This means that the majority of spend over EDI will be mid-to-high value transactions and are attractive financing candidates. The global nature of EDI networks also provides penetration across multiple geographies.
  • Web e-invoicing: Web e-invoicing has a shorter history, and has focused on the tax compliance element of invoicing electronically. A multitude of vendors are within this space, each offering different approaches to connecting suppliers. This model has been particularly successful in connecting smaller trading partners within the indirect materials space. This means that the majority of spend will be micro-to-low value, and while financing these invoices will provide value, a similar level of complexity exists for a lower return.

These two descriptions are perhaps too simplistic. Additional factors should be considered when examining different e-invoicing methods. Different types of spend may be more attractive for discounting. For example, a supplier who provides higher-margin services to your company may be more willing to accept a discount. However suppliers who are re-selling goods at lower margins are less likely to accept discounts.

SCF programmes also benefit a company’s overseas suppliers. New electronic pre-shipment trade finance instruments are being introduced that can replace an expensive letter of credit (L/C) or augment open account transactions. A bank payment obligation (BPO) is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date, after specified supply chain events have taken place.

The BPO places a legal obligation on the issuing bank to pay the recipient bank subject to the successful matching of data. In short, the BPO delivers business benefits and security equivalent to those previously obtained through a commercial letter of credit, while at the same time eliminating the drawbacks of manual processing.

Because a BPO provides payment certainty, it facilitates access to pre-shipment finance. A supplier can use a BPO as financing collateral because credit risk is transferred to the obligor bank, mitigating counterparty risk. Also, a bank can issue a BPO in the supplier’s local currency, mitigating foreign exchange (F/X) risk.

B2B Automation is a Treasury Opportunity

How suppliers fund the production of goods or services has been opaque to their customers. Without an intimate relationship with individual suppliers, a buyer’s only indication of a supplier’s financial health has been the supplier’s credit rating. With the rise of e-invoicing and increased visibility into the financial supply chain, there are new ways of providing liquidity to suppliers with better credit terms than traditional trade financing.

While the benefits of SCF for both trading counterparties are clear, buyers are sticking to tried and tested methods of optimising working capital. In a recent gtnews treasury survey nearly 50% of large UK corporate finance leaders stated they are more likely to extend supplier payment terms now than they were in 2011, increasing buyer-supplier tensions and increasing supplier credit risk.

By engaging in an e-invoicing and supply chain finance programme, treasurers can optimise their own working capital while improving processes, achieving cost savings and increasing visibility. Collaboration ensures suppliers also decrease costs, improve cash flow and have access to alternative, low-cost forms of financing.



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